Alternatives Flashcards
Property:
Heterogenous
Homogenous
Heterogenous = different
Homogenous = similar
Highest and best use
Measured as % return or actual profit?
Highest and best use relates to both vacant land and brown sites
Actual profit
ie $5m 20% margin is better than $3m 40% margin
Limitations of sales comparison method
1) Weak markets and low transactions volumes can make it difficult
2) difficulty finding comparable buildings
Real Estate Operating Company =
REOC = Does not have any tax advantages like REITs, they make money from buying and developing properties and selling at higher prices. Low initial investment levels but less earnings predictability.
What is the capitalisation rate =
Market Value with Cap rate =
Market Value with All Risk Yield =
Cap rate = discount rate - growth rate
(cap rate is lower than discount rate)
Market value = NOI / Cap rate
Market value = Rent / All Risk Yield
Market extraction approach of cap rates
Market value of Property given cap rate =
NOI given taxes =
(NOIa/Sale price + NOIb/Sale price = NOIc/Sale price) / 3 = Average cap rate
MV Property = Overall NOI / Avg Cap Rate
NOI = Potential gross income - property taxes
All Risk Yield Given current rent =
All Risk Yield = Current Market rent / Current mkt price of comparable properties
Valuation Method =
Assumes tenant bears all operation costs, constant rent which is discounted at the ARY.
Value given unrenovated NOI and Renovated NOI?
Unrenovated NOI + [(Renovated NOI (1+g) / r - g] / 1+r
If which is larger, current/reversion rent > contract rent/term rent then:
Layer Method =
Term & Reversion method =
PV of term rent =
Reversionary potential for rent increases exists
Layer Method = PV of term rent + PV of incremental rent
Term & Reversion method = PV of term rent + PV reversion to ERV
PV Term rent = old rent / ARY
ERV (Estimated Rental Value), Higher Yield, old rent.
PV of incremental rent
PV of reversion to ERV given cap raate
Cap rate =
PV of incremental rent = (ERV - Old rent / Higher yield) x (1 / 1 + Higher Yield)^n
PV of reversion to ERV = (ERV / Cap rate) / 1 + Cap rate
Cap rate = [Discount rate - growth rate] or [NOI / MV]
Curable depreciation vs incurable depreciation
Value of incurable depreciation =
Property value =
Curable is where the cost to fix is less than the value it will add and vice versa.
Value of incurable depreciation = [Effective age / Full life of building] x [property value - incurable deprecation]
Property value = cost of building - curable depreciation - incurable depreciation
Comparative property 2 stage given age% condition% location%
Stage 1: Comparable property / sq foot = price per sq foot
Price per square foot x 1+ (Age% +/- condition% +/- location%) = adjusted price per square foot
Adjusted price per sq foot x comparable property sq footage = Value of comparable
Transaction based property index
vs
Appraisal Based property index
Transaction based property index: Hedonic regression, repeat sales, regularly updated but ‘noisy’ due to volatile transactions.
Appraisal Based property index: Valued for shorter periods, less volatile.
Equity dividend rate (cash on cash rate) given NOI, equity and debt service =
First year cash flow =
Debt service ie 6% on £4m =
Equity in context of property?
Debt service coverage ratio =
EDR = First year cash flow(NOI - Debt service) / equity
First year cash flow = NOI - debt servicing
Debt service = 0.06 x 4m = 240k
Equity = difference between purchase amount and mortgage amount
Debt service coverage ratio = First year NOI / Debt service
DownREIT
UpREIT
DownREIT = The REIT itself owns properties and partnerships at the REIT level “DownREITpartnerships”
UpREIT = General partner with contolling interest of other partnerships - more common “Upgencontroller”
REITs with shorter terms
REITs which are employment sensitive
REITs with high volatility and cyclicality
REITs with less cyclicality
REITs with shorter terms = hotels and residential
REITs which are employment sensitive = Office
REITs with high volatility and cyclicality = Hotels
REITs with less cyclicality = Industrial REITs (logisitics)
Private Equity Distributed to Paid In Ratio (DPI) =
RVPI =
DPI = All years distributions / all years paid in capital
A low DPI suggest few successful exits.
RVPI = NAV After Distibutions / Called Down (CUMULATIVE!!) capital
Realised Value Paid In is value relative to paid in capital.
IRR of PE given called down capital yearly and operating results yearly =
IRR called down is a negative figure
CF0 = called down1 + Operating result0 CO1 = called down2 + Operating result 1 CO2 = called down3 + operting result 2 CO3 = Operating result 3 CPT: IRR = gross IRR
Venture Capital Ownership Fraction =
Ownership fraction =
Venture Capital Ownership Fraction = no. shares x [ownership fraction / 1 - ownership fraction]
Ownership fraction = value invested / value of venture
Management Fee given called down =
IRR Operating result =
Management Fee given called down = Cumulative called down x Management fee
IRR Operating result =
Check hurdle rate 7% £35m business is sold in Y2?
CF0 = 35m c01 = 0 C02 = 40m CPT: IRR = 6.9% (Does not clear hurdle rate)
Land NAV =
NAV ignores what?
NAV = (Operating real assets + Cash & Land) - (MV debt and liabilities)
NAV ignore soft values usch as goodwill and deferred tax.
AFFO
vs
FFO
AFFO = Removes straight line adjustment to ‘cash rent’
AFF = FFO - non cash rent - recurring maintenance capex
vs
FFO = Uses a straight line rent and adds back depreciation.
FFO = NI + Depreciation - gain from sales
Buyout funds
vs
Venture capital
For: asset based, leverage, debt or equity finance and working captial
Buyout funds = low working capital, lots of leverage and debt, strong asset base, predictable exit
vs
Venture capital = weak asset based, little use of leverage, primarily equity finance and high working captial
VC % Ownership required =
POST Money valuation given exit of £36m @ 30%r in 5 years
PRE - Money Valuation =
No. shares required =
VC % Ownership required = VC Investment / POST Money Valuation
POST Money valuation = PV of exit
36 / (1.3)^5 = 9.7m
PRE - Money Valuation = Post Money Valuation - VC Investment
No. shares required = founders shares x [VC% / (1- VC%)]
PE Funds
Ratchet Mechanism
Vintage year
PE fund closed or open ended?
Key man clause =
Funds become diluted why?
Risks to PE
PE Funds
Ratchet Mechanism = determines allocation between management and shareholders
Vintage year = year fund was launched
PE fund closed or open ended? = closed ended
Key man clause = General partner is prohibited from making new investments
Funds become diluted why? = Additional financing plans, management stock option plans.
Risks to PE = Reliance on management and government regulation.
Waterfall carried interest =
Waterfall carried interest = carried interest x ( Investment profit - Investment)
Commodities
Backwardation =
Contango =
F and S
Benefit of underlying vs interest and storage
Backwardation = F < S
Contango = F > S
Backwardation = Benefit of owning underlying is more than cost of interest and storage costs and vice versa
Calendar spread
Negative =
Positive =
Calendar spread = spot price - futures price
Negative = contango Positive = backwardation
Commodity Insurance Perspective Theory =
Hedging pressure hypothesis =
Theory of storage futures price given convenience yield =
Convenience yield
Commodity Insurance Perspective Theory = Commodity producers go short their crop in the futures market to avoid price risk. Hedgers provide a premium to encourange long positions.
Hedging pressure hypothesis = The commodity producer which is short ends up receiving a premium in contango markets.
Theory of storage futures price = commodity spot price + direct storage cost - convenience yield
Convenience yield = benefit of physically holding a scarce rare commodity over holding the future. “convenience of holding the real thing”
Roll return =
Collateral return =
Total return swap vs excess return swap =
Basis swap
Roll return = positive roll return is convergence of futures price toward spot price over time
Collateral return = interest paid on futures position usually always positive.
Total return swap vs excess return swap = Total return swap includes collateral yield
Basis swap = where one commodity is more liquid than another ie brent vs central american oil.
S&P GSCI Commodity index weighted how?
Rogers intl commodity index vs Deutsche and Bloomberg commodity idicies?
Production value weighted to oil producers may make up a larger proportion.
Rogers is rebalanced monthly, the others are rebalanced annually.
